In 2023, governments in Canada embarked on a significant subsidy campaign targeting major players within the electric vehicle (EV) industry, reflecting a trend also observed in many other economies globally. As shown in the following table, the federal government and provincial governments in Ontario, Quebec and British Columbia have recently announced a series of large subsidies to several major industrial projects with the aim of building a domestic EV battery industry.
Select recent government subsidies to major EV projects in Canada
Source: Dentons Bulletin, Canadian batteries and EVs: 2023 review and outlook for 2024; Government sources, (PBO, Prime minister’s office, Office of the Premier, Innovation, Science and Economic Development Canada)
Francois-Phillippe Champagne, the Canadian federal innovation minister, even welcomed the Volkswagen plant as a ‘game-changer’ for Canada, citing it as the largest single investment in the auto sector in Canadian history. Prime Minister Justin Trudeau’s website indicated that returns on the Northvolt investment will come in five to nine years. Other estimates show long break-even timelines for subsidies into the Northvolt (11 years), Volkswagen (15 years) or Stellantis (23 years) projects.
While attention has been drawn to recent headlines featuring high-profile announcements of substantial subsidies, they are actually just a small part of a much bigger story. Shedding light on the broader context, a recent Fraser Institute study estimates that from 2007-2019, the federal, provincial and local Canadian governments spent a total of $352.1 billion (inflation-adjusted) on business subsidies.
Advocates of subsidizing large corporations argue that such investments can lead to job creation, technological advancements, and a boost in international competitiveness. While policymakers view these subsidies as strategic investments, concerns linger regarding their potential to distort competition and their overall effectiveness in driving economic growth. The impact of such an economic policy approach on small businesses, which represent half of our private sector GDP and employ 63% of the total private labor force, remains less well understood.
With regards to large government subsidies to big business, the position from small business is clear:
Three in four small business owners oppose major government subsidies to select big businesses
Source: The CFIB omnibus survey Your Voice – November 2023 survey, was conducted online November 2-20, 2023. A total of 2,919 small business owners from Canada answered the question above. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/- 1.8%, 19 times out of 20.
Question: Do you support the use of government funds for major subsidies to select big businesses? (Select one)
This position reflects a concern shared by many small businesses that subsidies foster an environment that stifles competition, hampers innovation, and poses challenges for small business growth. They point out that these subsidies contribute to an unfair playing field by artificially lowering the costs for big businesses, granting them a competitive advantage over their smaller counterparts. Moreover, there is a risk that subsidized large corporations can leverage their financial superiority to erect barriers to entry for smaller competitors.
“It is difficult to survive when some businesses get subsidies that others pay the taxes for.”
- Social services business, Alberta
“Many of those subsidies are being handed over without checking public interest first or establishing whether the public needs or wants the final product...If the final product doesn’t get sold as expected, it is a big spend for no guaranteed long-term gain.”
- Transportation business, Ontario
Fundamental to a free-market economy is the principle of allowing market forces to dictate demand and supply. However, when governments try to control the market by picking ‘winners’ or ‘losers’ through financial support, it can lead to unintended consequences that can reshape the composition of industries and, consequently, the entire economy. Moreover, subsidies to big business run the risk of misallocating resources by incentivizing investments in industries that might not be economically sustainable without government support. This diversion of resources fosters a culture of ‘dependency’ that stifles innovation, economic efficiency and reduced government spending in other vital areas, which in turn can impede economic growth and innovation.
Even if all of the above were taken out of the equation, one important roadblock would remain in the way of major corporate subsidies to large corporations:
Nine in ten small business owners do not believe they receive their fair share of government support
Source: The CFIB omnibus survey Your Voice – November 2023 survey, was conducted online November 2-20, 2023. A total of 2,899 small business owners from Canada answered the question above. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/- 1.8%, 19 times out of 20.
Question: ‘Small businesses already receive their fair share of support from governments.’ (Agree/Disagree?)
Government messaging on recent subsidies to Volkswagen, Stellantis-LG and Northvolt often highlights the positive economic impacts and the potential for job creation. For instance, the prime minister has described the Volkswagen subsidy as a "generational investment" in Ontario's automotive sector that will create 3,000 direct jobs and tens of thousands of indirect jobs.
However, while touted as job creators, studies suggest that subsidies to large businesses often result in a net zero gain in employment and may even worsen labor shortages by diverting workers from unsubsidized smaller businesses. The concern over this zero-sum game is underscored by CFIB’s latest report on the cost of labour shortages, revealing that small- and medium-sized businesses in Ontario and Quebec suffered the most significant business opportunity losses due to a lack of employees, amounting to $16 billion and $8 billion respectively.
Further, CFIB data paints a contrasting picture regarding the economic impacts:
Merely one in ten small business owners foresee a positive impact from subsidies to large corporations
Source: The CFIB omnibus survey Your Voice – November 2023 survey, was conducted online November 2-20, 2023. A total of 2,905 small business owners from Canada answered the question above. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/- 1.8%, 19 times out of 20.
Question: ‘We expect our business to be positively impacted by one or more of the recent subsidies provided by governments to big business.' (Agree/Disagree?)
Notable in this figure is the fact that the lack of optimism persists even in provinces where these new factories are under construction, notably Ontario and Quebec, where only 14% and 11% respectively agree that they would benefit positively from subsidies to large corporations.
“Tax money should never be used to give massive subsidies to big business. It is an enormous waste as well as a flagrant discrimination of small business.”
- Manufacturing business, Ontario
“We have undergone an expansion and have had to pay for it out of our pockets and profits. It is frustrating when the government gives huge subsidies to companies like Enbridge for expansion projects into our area.”
- Retail business, Ontario
Championing small business
Heavily favoring large corporations over nurturing innovation and growth among smaller, more agile enterprises may carry significant long-term repercussions. This imbalance can potentially reshape the economic environment, placing an undue burden on taxpayers, as any setbacks experienced by these large corporations ultimately translate into losses for the public. Canada must thoughtfully evaluate its participation in the global subsidy competition, aligning its actions with climate goals while safeguarding the essential role of small businesses.
Small businesses in Canada serve as the bedrock of employment opportunity and economic vitality, also playing a multi-faceted role in their communities. Ultimately, directing resources towards a more equitable economic landscape and stimulating the resilience of small businesses is indispensable for ensuring Canada's long-term prosperity.
The substantial financial support extended to big business, when juxtaposed with the struggles of small businesses, prompts scrutiny regarding resource allocation and government priorities. While subsidies can indeed contribute to national objectives, policymakers must ensure that they yield tangible benefits to small businesses and the economy. As Canada navigates its clean energy transition and economic growth, striking a balance between supporting large corporations and fostering a fair competitive landscape for small businesses is paramount.
